Hated stocks snub their doubters

Want to get ahead of the market and score some big gains? Bet against the investors betting against the most-hated stocks.

Confused yet? It works like this: The stocks that aggressive speculators are betting will fall, by taking so-called “short positions,” are actually outperforming this month, says investment research firm Bespoke Investment Group. It’s a strange but somehow interesting twist showing even big-time investors willing to make oversize sized bets against stocks can have the market go against them.

Bespoke found 25 stocks in the broad Standard & Poor’s 1500 index have more than a quarter of their shares available for trade in the control of investors betting the stocks will fall. And at this point in August, already 16 of the stocks are up and 9 are down. Collectively, these most-hated stocks are up 0.4%, well ahead of the 0.2% rise of the S&P 500 during the same time.

The speculators did call some of the stocks right. Shares of for-profit educator ITT Educational (ESI) and LED maker Rubicon Technology (RBCN) are down by a brutal 20% during the month. Had these two stocks not been included, the average gain of the stocks being bet against would have been 4%, Bespoke says. These moves are huge for short-sellers, because when a stock rises, these investors have to buy shares back at higher prices. Investors pay close attention to short sellers. Some investors even think when short selling activity dries up, that means investors are getting overly bullish and the market is due for a pullback.